Disappointing quarter, revival to take time… • J&K Bank :: ICICI Securities, link

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Disappointing quarter, revival to take time…
• J&K Bank’s PAT was below estimate at | 172 crore, plunging 43%
YoY, mainly led by higher provisions of | 168 crore vs. expected | 80
crore
• Asset quality deteriorated QoQ taking absolute GNPA to | 2187 crore
(GNPA ratio: 4.73% vs. 4.16% in Q1FY15) from | 1888 crore. Fresh
slippages stood at | 377 crore vs. | 1161 crore in Q1 but higher than
witnessed in earlier quarters. Due to floods, ~ | 1200 crore of assets
has been impacted of which ~| 400 crore have already been
classified as stressed assets (RA or slippages) in Q2FY15
• Credit growth moderated further to 9.6% YoY (vs. 11.5% in Q1) to
| 45072 crore. Deposits grew a meagre 2.9% YoY to | 62972 crore as
on Q2FY15 vs. 8% expected. Margins were strong at 4%
Dominant position in J&K state on both deposit, credit front
The bank dominates the home state with ~65% market share (both
deposit & credit). Similarly, 65% of the bank’s deposit is funded from J&K
that guards the bank to a certain extent from deposit pricing competition.
Within J&K, the bank has ~53% CASA ratio and earns lucrative NIM of
6%+ in the state. About 40% of credit exposure is within J&K wherein it
earns yield of ~13% compared to sub-12% outside J&K. Going ahead, we
estimate total credit will grow at 17% CAGR in FY14-16E to | 63505 crore.
The credit book within J&K is estimated to grow at a more rapid pace of
23.5% CAGR (FY14-16E) to | 29005 crore (45%of credit).
NIM among best in industry at 4%+ - to sustain, going ahead
J&K Bank has steadily improved its NIM from ~3% in FY10 to consistent
4%. The bank earns 6%+ NIM within J&K and sub 3% NIM outside J&K. A
further improvement in the CD ratio from 66.9% in FY14 to 68.5% in
FY16E and faster credit growth within J&K (high yielding portfolio) shall
enable J&K Bank to maintain its NIM at 4%+ level. Steady credit growth
and healthy NIM will support NII CAGR of 12.5% from | 2685 crore in
FY14 to | 3397 crore in FY16E. Subsequently, PAT is estimated to grow at
6.4% CAGR from | 1183 crore in FY14 to | 1338 crore in FY16E.
Asset quality deteriorates but likely to improve, going ahead
Large corporate (mostly AAA) comprises 84% of credit portfolio outside
J&K and almost 50% of the total credit of J&K Bank. Asset quality issues
are significantly low in this segment. Within J&K, 34% are personal loans
wherein majority are salaried account with the bank. Hence, NPA risk is
relatively low. For loans outside J&K there were two chunky accounts
(| 1000 crore total) that added to NPAs in Q1FY15. The bigger agriculture
account is in CDR and may get upgraded in the coming quarters. GNPA,
hence, is estimated to rise from | 783 crore in FY14 to | 2692 crore in
FY16E with NNPA at | 1271 crore (2% of credit) in FY16E.
Reducing earnings estimates and target price
Post the recent poor performance compared to peers, the stock is trading
at in-expensive valuations of 1x FY16E ABV. However, owing to a surge in
NPA in past two quarters and floods in J&K, we believe it will at least take
two or three quarters for the bank to be on track. We have reduced
earnings CAGR estimates over FY14-16E from 13.6% earlier to 6.4% now.
This is owing to an increase in NPA estimates and consequent
enhancement in credit cost. Accordingly, our FY16E ABV reduces to | 126
from | 146 earlier. We reduce our target multiple from 1.2x FY16E ABV to
1.1x and our target price to | 145 from | 170 earlier. We maintain HOLD.

LINK
http://content.icicidirect.com/mailimages/IDirect_JammuKashmirBank_Q2FY15.pdf